Over the past six months, DXC’s stock price fell to $11.70. Shareholders have lost 5.1% of their capital, which is disappointing considering the S&P 500 has climbed by 12%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think DXC Will Underperform?
Even with the cheaper entry price, we’re sitting this one out for now. Here are three reasons why there are better opportunities than DXC, plus one stock we’d rather own.
1. Core Business Falling Behind as Demand Declines
We can better understand IT Services & Consulting companies by analyzing their organic revenue. This metric gives visibility into DXC’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, DXC’s organic revenue averaged 4.9% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests DXC might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Growth Has Stalled
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
DXC’s flat EPS over the last five years was weak. On the bright side, this performance was better than its 6.4% annualized revenue declines.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
DXC historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.6%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.
Final Judgment
DXC doesn’t pass our quality test. After the recent drawdown, the stock trades at 4.1× forward P/E (or $11.70 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
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